Question 3: (20 points total; 10 points for each subpart) (a) Facts: Pure-Blood Corporation ("PURE") is a Delaware corporation that has the following capital structure: Shareholder Shares Basis/Share Instrument Cygnus 750 $100 Voting Common Stock Narcissa 450 $10 Voting Common Stock Draco 750 $50 Voting Common Stock DEATH EATERS INC. 750 $200 Voting Common Stock Slytherin Partnership 300 $100 Voting Common Stock Cygnus is Narcissa's father and Draco's grandfather (Draco is Narcissa's son). Cygnus is a 50% shareholder in DEATH EATERS INC. and a 40% partner in Slytherin Partnership (Tom Riddle, an unrelated person, is the 60% partner). Draco is the owner of the remaining 50% of the stock of DEATH EATERS INC. PURE has an accumulated E&P deficit of ($10,000) on January 1, 2022. During 2022, PURE earns positive E&P of $2,000. On April 1, PURE redeems all of Draco's 750 PURE shares in exchange for $7,500 cash, and, on October 1, PURE redeems all of Cygnus's 750 PURE shares in exchange for the Locket of Salazar Slytherin, with a value of $7,500 and a basis of $5,000. Page 8 of 13 Questions: What are the U.S. federal income tax consequences to both PURE and Draco and Cygnus as a result of the redemptions? Could Cygnus or Draco file a family attribution waiver and would that change the outcome? (b) Facts: Assume the same capital structure as described in (a), except that Slytherin Partnership is a corporation (SLYTHERIN CORP.) instead of a partnership. Cygnus wishes to extract earnings and profits from PURE to start his own School of Witchcraft and Wizardry, but would like to get capital gains treatment and use his basis in his SLYTHERIN CORP. stock to decrease the tax cost of the transaction. Accordingly, Cygnus plans to sell his SLYTHERIN CORP. stock to PURE for cash and report the transaction as a sale of stock under section 1001. Question: Is Cygnus right that his sale of SLYTHERIN CORP. stock to PURE for cash will be governed by section 1001? Why or why not? Would your answer change if Cygnus sold his DEATH EATERS INC. stock to PURE instead? Why or why not?